SBA reduces criminal history restrictions in one of its business development programs

We are very pleased to see that the U.S. Small Business Administration has taken a significant step toward ending discrimination against justice-affected small business owners in the programs it administers. In a new rule governing certification of veteran-owned businesses for preferential treatment in the award of VA contracts, the SBA has omitted a requirement that business owners must have “good character” to be certified.  This is a step we recommended in commenting on the rule when it was proposed last summer, and we are gratified that the SBA accepted our recommendation.

CCRC’s study of the SBA’s record-based restrictions has identified the “good character” requirement as that agency’s long-established way of weeding out people with a criminal history from the programs it administers, including business loans, disaster assistance, and federal contracting opportunities like the one at issue here. Typically, SBA operating procedures give agency staff broad discretion to deny assistance to justice-affected business owners based solely on untested assumptions about perceived risk and desert embodied in the “good character” requirement. Broad inquiries into criminal history on application forms deter many from even applying.

It was therefore a matter of concern to see a “good character” criterion included when the SBA proposed its veteran-owned business rule last summer. The good news was that this offered a first chance for public comment on how this criterion limits opportunities for justice-affected business owners. And it appears that it has led to a very favorable outcome that augurs well for future SBA criminal record reforms.

When the SBA proposed its rule on certifying veteran-owned businesses in August, CCRC worked with the Washington Lawyer’s Committee for Civil Rights to draft comments that were critical of the SBA’s vague and open-ended test of business owners’ “character” that results in disqualification of many deserving individuals from this and other federal programs administered by the SBA. Those comments, which were joined by 24 other organizations, were filed on August 5 and are available here.

The comments commended the SBA’s proposal to extend eligibility for certification to veteran business owners who are in prison or under supervision in the community, but expressed concern that these same individuals – along with other veterans with a criminal history who have fully served their sentences — could be arbitrarily excluded from a program specifically intended to benefit them:

The proposed removal of categorical exclusions for those on parole, probation, or who are incarcerated is an important step. However, the Proposed Rule’s continued use of “good character,” as well as the absence of any substantive or procedural criteria to guide decision-making, will continue to deny certification to individuals with significant business ability who otherwise could effectively and responsibly perform federal government contracts and contribute to the development of their communities.

Our comments were also critical of the SBA’s “disjointed approach to ‘good character’ determinations in its various programs,” pointing out that other specialized contracting programs administered by the SBA (women-owned businesses and HUB Zone contracts) do not include a good character test.  However, the SBA’s general business loan programs and the larger 8(a) contracting program use “good character” determinations as a way of denying assistance to justice-affected business owners.

We urged the SBA to abandon entirely the “undefined and potentially invidious ‘good character’” test, and instead to adopt “an evidence-based, transparent, and objective method of assessing the intersection between criminal record and effective contract performance.”

We are very pleased to see that the SBA accepted our recommendation in the final version of the rule and eliminated the “good character” test from the rule entirely.  As finalized, the rule would permit consideration of an applicant’s conduct only if it resulted in formal debarment or suspension from federal contract eligibility, or if an applicant intentionally made false statements in their application.  Explaining the final rule, the SBA noted that it had “considered a modified good character requirement that could render an applicant ineligible if there were outstanding issues relating to moral turpitude or business integrity,” but had decided that these issues could be considered by a contracting official only if they were shown to reflect adversely on an applicant’s ability to perform the contract:

SBA views the issues related to whether the concern has the necessary integrity to perform a contract in the same way as it does questions relating to whether the concern has the necessary financial wherewithal, capacity or tenacity, and perseverance to perform a contract. All are responsibility issues determined by a contracting officer relating to a specific contract.

The SBA also echoed the observation in our comment about the absence of the “good character” test in some other specialized contracting programs and noted that “SBA seeks to make its contracting program regulations as consistent as possible.”

We plan to hold the SBA to its word here: The next step in making its contracting program regulations consistent must be for the SBA to remove the “good character” restrictions from its larger 8(a) business development program, where they have explicitly limited opportunities for justice-affected individuals for more than three decades. After that, the SBA must consider whether similar “good character” requirements can be justified in its lending and disaster assistance programs, in light of their explicit exclusion of justice-affected individuals and disparate impact on minority business owners.